Federal prosecutions of alleged provider kickback schemes may be hindered by the recent federal appeals court decision in the closely watched Hanlester clinical laboratories case, some provider attorneys say.
Although others agree with the assessment, they urged their brethren to stop gloating lest the government appeal the decision or ignore its impact in other federal jurisdictions.
`All this chest-beating could encourage HHS to seek a legislative remedy, ask the (appeals court) for a rehearing or appeal the case to the Supreme Court," said one attorney who requested anonymity.
Two days after the attorney offered his warning, HHS obliged.
HHS Inspector General June Gibbs Brown announced that the agency will ask all 12 judges of the 9th U.S. Circuit Court of Appeals in San Francisco to reconsider the ruling, rendered by a three-judge panel of the court.
Brown also said the agency will not apply the 9th Circuit's narrow legal standard in other federal jurisdictions.
In Hanlester, the appeals court on April 6 upheld the legality of the Medicare anti-kickback law but narrowed the definition of what constitutes a violation of the law (April 10, p. 4).
Patric Hooper, the attorney who defended the laboratories, labeled the 9th Circuit's view of the kickback statute "dramatic."
"Under this standard, it will be difficult for the government to prosecute a criminal or civil kickback case," Hooper said. "It offers providers very important legal protection."
Although the 9th Circuit rejected several other positions argued by the laboratories, Hooper called the ruling a victory: "We have nothing to appeal."
The appeals court was the latest stop for the Hanlester legal train, which left the station in 1989 (See chronology).
The key issue in the case was whether the return on investment paid to physician owners of three California laboratories represented illegal kickbacks to induce patient referrals to the labs.
The anti-kickback provisions of the Medicare and Medicaid fraud and abuse statutes bar any form of remuneration to induce patient referrals. Congress amended the statutes in 1987 to make violations of the law a civil offense, punishable by exclusion from Medicare and Medicaid, as well as a criminal offense, punishable by fines and imprisonment.
The Hanlester case, so named because the labs' general partner was a Santa Ana, Calif.-based partnership called the Hanlester Network, represented the first attempt by HHS' inspector general's office to exclude a provider from Medicare and Medicaid under the 1987 civil amendments.
Although the physicians' return on investment was the key issue, the definition of what constituted an illegal kickback became the dominant legal question of interest to the industry. In fact, the definition of a kickback became virtually the only issue as the labs went out of business in 1990.
Throughout the nearly 6-year-old case, HHS pushed a broad definition, which could assist in enforcement, while the labs pushed a narrow view, which could help shield providers from kickback allegations.
And the definition bounced from one extreme to another during the case.
In one phase of the litigation, a federal administrative law judge sided with HHS and said any payment that resulted in patient referrals could be an illegal kickback even if the purpose of the payment wasn't solely for referrals. But a year later, the same judge reversed himself and said referrals must be an actual or implied condition of payment in order to make the payment an illegal kickback.
HHS stole the ball back when an HHS appeals board overruled the judge and adopted a broad definition of a kickback, which the appeals board said could be anything of value offered with the intent of influencing a physician's judgment (Sept. 23, 1991, p. 2).
That definition held up through another stop at the administrative law judge, at the HHS appeals board and at federal district court before the 9th Circuit took up the issue.
And to providers' delight and HHS' dismay, the 9th Circuit said providers can't violate the law unless they know that the law bars remuneration for referrals and they engage in kickback schemes "with the specific intent" to disobey the law.
Consequently, providers who participate in suspect business deals may be able to sidestep kickback charges by pleading ignorance of the law or claiming that they never intended to violate the law, attorneys say.
In her statement, HHS' Brown said the specific intent standard is rarely applied in criminal law and shouldn't have been applied in this case.
"The real question is the government's enforcement posture," said Thomas Crane, an attorney with Hinckley, Allen & Snyder in Boston. Crane is a former top attorney with HHS who pursued the investigation and charges against the Hanlester labs.
In practical terms, most providers will be unwilling to test the government in court in a kickback matter unless the terms of a proposed settlement with the government are so onerous that a provider has no other choice, Crane said.
Storied kickback case dates back to 1989
December 1989: HHS notifies three physician-owned laboratories in â– California of pending exclusion from Medicare and â– Medicaid for allegedly paying kickbacks to physician â– investors for patient referrals.
December 1989: SmithKline Beecham Clinical Laboratories, which managed the labs, pays HHS $1.5 million to settle â– kickback charges.
May 1990: In a preliminary ruling, a federal administrative law
â– judge rules that payments to providers may be illegal â– even if the purpose wasn't solely for patient referrals.
March 1991: Federal judge rules that labs technically violated the
â– law but doesn't punish them; judge says referrals â– must be actual or implied condition of payment.
September 1991: HHS appeals board reverses ruling, sends case â– back to federal judge for reconsideration under broad â– definition of illegal kickbacks.
March 1992: Federal judge finds labs guilty under new legal â– standard and permanently bars labs from Medicare, â– Medicaid.
July 1992: HHS appeals board upholds federal judge's ruling â– and adds sanctions against lab executives.
February 1993: Federal district court upholds ruling of HHS appeals
April 1995: Federal appeals court affirms, in part, and reverses, â– in part, district court ruling.
Source: HHS, federal court records